Interview, Fireside Chat
What’s Next for the U.S. Dollar
- Global growth is expected to be strong in 2021, with Goldman Sachs economists forecasting a 6.1% increase driven by a safe and effective vaccine.
- The U.S. dollar is projected to weaken in 2021 alongside a broad uplift in global growth and increased risk appetite, easing financial conditions for dollar-borrowing emerging markets.
- G10 currencies are expected to see a gradual strengthening against the dollar, though upside is currently viewed as limited, with the euro and pound anticipated to appreciate due to European growth and a Brexit deal respectively.
- Currencies with embedded commodity exposure are expected to perform best against the dollar, while emerging market currencies are forecast to recover unevenly due to local COVID outbreaks and differing local policy responses.
- Specific emerging market outlooks include the Mexican peso expected to continue recovering strongly due to conservative monetary and fiscal stances, contrasting with the Brazilian real which is expected to weaken considerably because of looser policies.
- Policymakers are expected to prioritize supporting local economies and bond markets through rate easing rather than intervening to support their currencies.
- The U.S. dollar is expected to remain preeminent given the strength of U.S. institutions and the lack of a liquid market alternative, though shares of the euro and yuan in sovereign wealth and reserve portfolios are likely to grow.
- Non-sovereign digital currencies like Bitcoin are expected to play a role in investor portfolios despite not being a meaningful competitor to the dollar, alongside central banks considering the launch of their own digital currencies.
- Gold is expected to remain appropriate as a hedge against equities and cyclical exposures due to high correlation with real yields, while the Japanese yen is also expected to act as a hedge due to low correlation with other asset classes.
- Equity indices, commodities markets, and emerging markets are generally expected to perform well in 2021, with opportunities likely to arise from market disruptions.
- Regulatory frameworks for digital assets remain unclear, and while the dollar's status as a safe haven is not considered definitively ended, it is viewed as highly premature to declare it so given the deep market for safe assets.